On Vertical Integration

More increasingly, we have been seeing a trend of M&A activity in which companies are seeking to further increase vertical integration. For those not familiar with the terminology, vertical integration is the extent to which a company controls both the upstream production and the downstream retailing (and everything in between).

Earlier on in the last 50 years large companies have pre-dominantly stayed away from such a model, particularly following anti-trust and anti-monopoly sentiment. In addition, companies had a tendency to focus on a specific segment of the supply chain as a path to acquire the majority of the market share in their respective markets. However as these companies started to dominate their markets together with other large competitors, there was a need in terms of both a competitive advantage as well as a growth engine. Vertical integration was seen as a solution for both of these problems. On one hand it would give companies levers on their inputs or outputs, giving them more flexibility and a competitive advantage. On the other, it allows the company to further grow and expand its economical activities.

I expect this trend of vertical integration to further spread into the rest of the major industries over the next few years. Note that vertical integration does not necessarily mean that the same company has to own the entire supply chain. For instance, situations where a company has exclusivity over upstream or downstream activities with certain partners can also be considered vertical integration (to a looser extend). One last note on vertical integration, is its benefits to investors as it helps balance out the fluctuations in profits within the upstream and downstream space. This makes the profit stream more predictable, a haven for investors.

Regards,

Omar Halabieh

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